CLOs focus on belt tightening, best value from law firms

Chief legal officers at companies across the country are bent on controlling costs and getting the best value from outside law firms, according to a survey released Oct. 24 by the Association for Corporate Counsel.

Nearly two-thirds, or 63 percent, of respondents said they use some type of value-based fee arrangement when paying outside law firms, up from 32 percent in 2009, instead of paying hourly rate. And roughly 50 percent said two things would improve their relationships with outside counsel — more focus on matter and budget management and value-based fees/fixed fees/discounted rates.

During August and September, ACC sent surveys to 5,665 of its members and 2,905 nonmembers holding the title of chief legal officer or general counsel. Of the 1,165 responses, 42 percent were employed by private companies, 34 percent work for public companies, with the remainder at nonprofits, subsidiaries of foreign companies and other organizations.

Reducing outside legal costs and managing the increasing workload with tighter budgets and fewer resources ranked second when CLOs were asked to identify their most pressing issue. Keeping apprised of company activities that may have legal implications was No. 1.

Max Laun, Alcoa assistant general counsel and president of Pittsburgh’s ACC chapter, said he was “a little surprised” that this was the top concern.

“Certainly, being on top of a company’s substantive legal issues trumps administrative concerns like budgets,” Laun said.

“And we are in an era of increased scrutiny of corporations. Since for all of us, our corporate good name is an essential part of identity and value, most large companies have systems in place that try to ensure that any local political issues get raised up within the organization for review and tracking both on the public affair and the legal compliance side. If there are allegations of illegal or noncompliant activity, we all have internal pathways to get these raised and investigated.”

Laun said the results were consistent with what he’s hearing from local ACC members.

“We may be a bit more budget- and cost-oriented, given the state of the western Pennsylvania economy, but understanding what faces our companies in this economy remains key,” Laun said.

Half of the survey respondents indicated they’re still stymied by the downturn in the economy, resulting primarily in an increased workload. Some cited decreases in outside counsel expenditures and internal salary freezes.

Over two-thirds of CLOs are implementing practices to create cost/time efficiencies and/or generate value for their department. While 48 percent claim to keep outside counsel expenditures under $1 million, 18 percent said they’re spending more than $5 million annually. Slightly more than one-third indicated that they have taken steps to control outside legal spending and have realized savings from doing so.

A regional breakout was not available. Meyer Unkovic & Scott LLP Managing Partner Kevin McKeegan said that while the gist of the study is in tune with what he’s experiencing, there may be some differences across markets.

“Some of this is dependent on the local market and how hourly rates play into budgets,” McKeegan said. “I suspect a general counsel in New York would have a different perspective than one sitting here in Pittsburgh.”

McKeegan agreed that clients are “much more interested” in reaching fee arrangements that “reflect some value-added” and in making the most cost-efficient decisions possible.

John Glicksman, Pittsburgh Life Sciences Greenhouse vice president and general counsel, said he pushes for alternatives to hourly billing and has found local law firms cooperative.

“The economic climate hasn’t made that much of a difference,” Glicksman said. “I always try to minimize costs, and I do as much work as I can myself.”

Jeffrey Letwin, managing partner of Schnader Harrison Segal & Lewis LLP’s Pittsburgh office, has seen first-hand that corporate law departments are increasingly trying to control costs.

“In many situations, we’re being asked to respond to an RFP as opposed to automatically assuming we’ll get the work,” Letwin said.

“They’re trying to get proposals, and sorting through them is becoming a popular method for retention of counsel. They’re not going out to the world, but to a select group they’ve previously identified as quality firms, but you have to respond to the proposals and, in many instances, bid.”

Clients continue to veer away from hourly rates, he said.

“We’re being asked for fixed-fee proposals or a sort of blend for transactions not guaranteed to close — they’ll request to share the risk by working toward a fixed fee or reduced hourly rate proposals with some success-based component,” Letwin said.